SUOMEN PANKKI Bank of

Contents

Bank of Finland's objective and tasks Photograph: Peter Mickelsson Peter Photograph:

The Bank of Finland is Finland's The Bank participates in a wide range of and a member of the European System of Cen- research activities through its Research tral Banks (ESCB). The Bank of Finland's pri- Department and the Institute for Economies mary objective is to maintain price stability, in Transition. The Bank also handles contacts which provides a firm foundation for econo- with numerous international organisations. mic welfare. In working toward this goal, the Bank participates in prepar- Key goal: economic stability Central bank ations, decision-making and communications By carrying out its tasks, the Bank of Fin- The authority responsible for monetary policy, whose of the , as well as in the implemen- land promotes a stable operational tasks include influencing the tation of monetary policy in Finland. environment for economic entities and economy's supply of money, market interest rates or ex- The Bank of Finland's tasks, objectives provides a foundation for economic growth change rates. The position and tasks of the central bank and related matters are prescribed in the Act and employment. The same goals motivate vary notably among differ- ent countries. on the Bank of Finland, under which the the Bank's active participation in economic European System of Bank is further obliged to policy discussions, in Finland and in Central Banks (ESCB) – participate in maintaining the reliability various international fora. The ESCB was launched on 1 June1998. Although its and efficiency of the payment system and The Bank of Finland, as one of the coun- membership includes all EU national central banks and overall financial system and in their try's key sources of economic expertise, adds the ECB, only the central banks in the Eurosystem par- development a formidable analytical input to the discussion ticipate in the conduct of the – issue banknotes and, in cooperation with of economic policy. Within the ESCB, the single monetary policy. The excluded EU national central banks and other enterprises, contribute to Bank of Finland functions as an active and banks participate in the co- operative work of the ESCB maintenance of the currency supply constructive member as well as a source of only to a limited extent.

– contribute to the holding and manage- special expertise on the Finnish economy. In Eurosystem System comprising the Euro- ment of international reserves the latter role, the Bank provides information pean Central Bank and na- – provide for the compilation and publica- on the impact of the Eurosystem's single tional central banks of the euro area. The Eurosystem tion of statistics as required for carrying monetary policy on the Finnish economy its began conducting the euro area's single monetary policy out its tasks consequences for domestic decision-making. at the start of 1999.

Suomen Pankki · Bank 3 History

When Finland gained its independence, the Bank's status as central bank was confirmed. Starting with the period of the Second World War and lasting for several decades, the Bank of Finland had a broad mandate to regulate Finland's foreign currency and cap- ital flows. In the late 1950s a gradual process of deregulation was set in motion, which led

Photograph: Brunskow Photograph: The Bank of Finland was The Bank of Finland is one of the oldest central to complete dismantlement of the system in established in 1811 – more than a hundred banks in the world. In connection with the early 1990s. years before Finland's Finland's separation from Sweden and transfer The Bank of Finland's primary objective independence. The picture shows office staff at the to the jurisdiction of Russia in 1809, the was defined as safeguarding the markka's ex- Bank's main office in decision was made to overhaul Finland's ternal value. This was brought about by influ- 1910. monetary framework. In 1811, Tsar Alexander encing the amount of money in circulation, the I decreed the establishment of the 'Waihetus- level of interest rates, and the markka's value Laina- ja Depositioni-Contori' in , the relative to other currencies. The Bank was also then-capital of Finland. From this start, as what charged with maintaining financial stability was primarily an office for exchange of and promoting the security and efficiency cur- banknotes, lending and state cash operations, rency supply operations. The Bank had the sole Finland's first bank developed into the Bank of right to issue banknotes and coins. Finland. In 1819 the Bank was moved to In 1995, after a referendum, Finland , which had been named the new joined the . One reason for capital city. entering into membership negotiations had The Bank of Finland began to operate as been the desire to stabilise the country's a true central bank in the latter part of the economic situation. For a small country such 1800s, when Finland obtained its own cur- as Finland, maintaining stable monetary rency and commercial banks were estab- conditions is easier if the country were part lished. The Bank of Finland began to trans- of a single European economic area than if fer payments between banks and to make it were to remain on the outside. emergency loans to them as the need arose. Introduction of the euro in 1999 did not In 1875 a regulation concerning the Bank essentially change the Bank of Finland's tra- stated that it was charged with ensuring that ditional tasks. The biggest change was that, financial institutions remained stable and instead of acting solely on a national basis, secure and with promoting and facilitating the Bank now functions as a part of the Euro- the smooth flow of money in the economy. system of central banks.

4 Suomen Pankki · Finlands Bank Position and administration

Parliament President appoint Board members elects Bank of Finland

Parliamentary Supervisory Government Council supervises dialogue

membership, ownership

European System of Central Banks

According to the Constitution, the Bank of In carrying out its tasks within the Euro- Finland operates under the guarantee and pean System of Central Banks, the Bank of supervision of Parliament. The Bank is re- Finland acts under the guidance and di- sponsible for its operations to Parliament rection of the and thus to the Finnish people as a whole. (ECB). Otherwise, it functions independent- The Bank of Finland's administration and ly or, as necessary, in cooperation with the operations are supervised by the nine-mem- and other authorities. ber Parliamentary Supervisory Council, which is elected by Parliament for an election term and is usually composed of Members of Parliament. The Council annually reports on

its operations and administration to Parlia- Jaakko Koskentola Photograph: ment's Economy Committee. The operations of the Bank of Finland are not financed by tax revenues but by its own earnings. One of the ways the Bank earns in- European Central Bank come is by investing its international reserves (ECB) The administrative centre of in income-earning assets. By law, half of each the ESCB and Eurosystem, established on 1 June 1998. year's profit is transferred to the state and half The ECB is owned by the na- is added to the Bank's reserves. The Council, tional banks of all the EU countries. It is located in where there is sound reason, can decide on Frankfurt, Germany, and its staff numbered 1200 at some other division of the profit. end-2003.

Suomen Pankki · Finlands Bank 5 Board

Board of the Bank of Finland, 1 Jan 2004: Deputy Governor Matti Louekoski, Governor Matti Vanhala, and Board members Sinikka Salo and

Pentti Hakkarainen. Johan Ahlroth Photograph:

The Board is responsible for seeing that the context, the Parliamentary Supervisory Bank carries out its assigned tasks. The Council makes its own proposal to the Board decides on a division of responsibil- Government. The Governor's term of ities such that each member oversees speci- office is seven years; and five years for other fied departments and units. members of the Board. The same person The law requires that the Bank's opera- may be appointed to the Board for up to tions be organised in an effective and effi- three terms. However, a person who has cient manner. The Board regularly reports served on the Board may still be named to the Parliamentary Supervisory Council Chairman for up to two terms. on the implementation of monetary policy The Bank of Finland's Governor is a and other Bank operations. member of the Governing Council of the The Board may comprise, in addition ECB, the highest decision-making body in to the Chairman (Governor of the Bank), the Eurosystem, as well as the General up to five other members. The President of Council of the ECB, which deals with issues the Republic appoints a member on the affecting the whole European System of basis of a Government proposal. In this Central Banks.

6 Suomen Pankki · Finlands Bank Staff and organisation

Organisation of the Bank of Finland 1.1.2004

Parliamentary Supervisory Council Financial Supervision Authority

Board

Matti Vanhala Matti Louekoski Sinikka Salo Pentti Hakkarainen Governor Deputy Governor Member of the Board Member of the Board

• Overall responsilibity • Financial Markets • Research • Market Operations for ESCB affairs • Currency Supply • Institute for • Payments • Economics • Personnel Economies in • Information • Communication • Legal Affairs Transition Technology • International • Management • Statistics • Administration Secretariat Secretarial Staff • Development and • Security • Internal Audit Budget

At the end of 2003, the Bank of Finland's out in the Bank's branch offices, in , staff totalled 627. The number of employees , , Turku and Vantaa. has decreased in recent years while the share The organisation of the Bank of Finland is of specialists has increased. Nearly half of divided into offices and special units, the heads the Bank's employees have completed a uni- of which report to the Board. The larger versity-level degree. The Bank staff prepares departments are further divided into divisions, and implements euro area monetary policy whose heads report to the department heads. and carries out extensive economic research. Other Bank activities include analysis, fore- Financial Supervision Authority casting and statistical compilation relating Operating in connection with the Bank of to economic performance; investment of Finland, but as an independent authority, is Finland's international reserves; and tasks the Financial Supervision Authority (FSA), associated with administration and person- which supervises the financial institutions. nel. The FSA is charged with promoting finan- The jobs of nearly a fifth of the Bank's cial stability and confidence in supervised employees are concerned with the supply of institutions and markets. At end-2003 the payment instruments. This work is carried FSA employed 138 persons.

Suomen Pankki · Finlands Bank 7 Bank of Finland in the ESCB

Member countries of the European System of Central Banks, from 1 May 2004: ■ Euro area, ie countries that have entered stage 3 of EMU and adopted the euro: Belgium, Spain, Netherlands, Ireland, Italy, Austria, Greece, Luxemburg, Portugal, France, Germany, Finland ■ EU countries that have not joined the euro area: United Kingdom, Sweden, Denmark ■ New members of the EU and ESCB from 1 May 2004: Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia, each of which will adopt the euro once it meets the economic criteria

The Bank of Finland is part of the Euro- trative centre of the ESCB and is located pean System of Central Banks (ESCB), in Frankfurt. which includes all EU national central The Eurosystem is the ESCB's core banks and the ECB. The national central group and includes all the national central banks own the ECB, which is the adminis- banks of the euro area, ie the 12 countries

8 Suomen Pankki · Finlands Bank European Central Bank is located in Frankfurt

EMU Economic and Monetary Union, whose aim is to pro- mote economic cooperation and economic development among EU countries. The EMU progressed in stages to reach the third and final stage on 1 January 1999. Stages 1 and 2, which began in 1990 and 1994, comprised a period of convergence among EU countries, and stage 3 marked the introduc- tion of the common currency - the euro - in the countries participating in the euro area.

Monetary policy Public authority measures that influence the structure and functioning of the monetary system. Monetary policy is aimed at achieving the goals of general econom- ic policy. Central banks implement monetary policy by affecting the economy's money supply, market interest rates, or exchange rates.

ECOFIN The Council of the EU in the composition for deciding on economic and financial mat- ters. ECOFIN meetings are Photograph: Hanna Saira Photograph: attended by finance or eco- nomic ministers from the EU that have entered stage 3 of EMU and adop- private entities. Independence means that countries. The Eurogroup is an unofficial part of ECOFIN, ted the euro. The Eurosystem began to con- ESCB members can neither ask for nor comprising the finance duct the single monetary policy at the start take directions from any outside entity. ministers from the euro area countries, which meets to of 1999. The Bank of Finland is the Finnish Independence is important for the oper- discuss - but not decide - matters concerning just the part of the Eurosystem and represents ability of the central banks and for the euro area. Finland in the system and the Eurosystem in credibility of monetary policy. European Council Summit meeting of the EU, Finland. The ECB reports regularly on its oper- attended by member-states' Heads of State or Govern- Under the Treaty establishing the ations to the European Parliament, Euro- ment. Its tasks include the European Community, the ESCB is to be pean Commission, ECOFIN Council, and provision of broad guidelines for economic policy and tak- independent of EU bodies, member state European Council. ing up of issues that other EU bodies have not been able to Governments, and all other public and resolve.

Suomen Pankki · Finlands Bank 9 ESCB organisation

Issues concerning all the EU countries are dealt with in the General Council of Eurosystem ESCB = = the ECB, which is composed of the gover- ECB Eurosystem + + nors of the EU national central banks and Banca d´Italia EU:s other national central banks: President and Vice-President of the ECB. Banco de España Banka Slovenije The General Council generally convenes four times a year. It participates in the Banque centrale du Luxembourg v Banque de France Ceská národní banka ECB's advisory and coordinating activ- Central Bank and Financial Services Authority of Ireland Eesti Pank ities and in preparations for euro area Latvijas Banka enlargement, but not in Eurosystem Lietuvos bankas Nationale Bank van België – Magyar Nemzeti Bank decision-making. Banque Nationale de Belgique Národná banka Slovenska Preparations for Eurosystem and ESCB Oesterreichische Nationalbank Narodowy Bank Polski Suomen Pankki – Finlands Bank decisions are made in all the national central banks and in their joint committees, which include experts from all the ESCB member European System of Central Banks, from The Bank of Finland's Governor is a mem- central banks. Euro area matters are dealt 1 May 2004 ber of the Eurosystem's highest decision- with only by representatives of the Eurosys- making body, the Governing Council of the tem. There are 13 of these committees and ECB. The Governing Council comprises each one focuses on a certain area of con- 18 members: the governors of the euro cern. area national central banks and the six Many of the committees have perma- members of the ECB Executive Board. nent or temporary working groups. The The Executive Board meets in Frankfurt, committees do background work on issues ESCB committees generally twice a month, and its main for which the EBC Executive Board will – Budget Committee – International Relations responsibility is to decide on euro area make proposals to the Governing Council Committee – Accounting and Monetary monetary policy. and General Council. The latter, in turn, Income Committee – Legal Committee The ECB Executive Board is composed decide what issues will be acted on by the – Payment and Settlement of the President and Vice-President of the ESCB. The Bank of Finland can have an Committee – Market Operations ECB and four other members. The Board impact on ESCB decisions already at the Committee – Banking Supervision handles the daily tasks of the ECB, under preparation phase via the committees and Committee – Monetary Policy Committee the guidance of the ECB Governing Coun- working groups. – Banknote Committee – Internal Auditors Committee cil. In other words, the Executive Board – Information Technology directs ECB operations in Frankfurt. It also Committee – Statistics Committee makes preparations and decision propo- – External Communications Committee sals for ECB governing Council meetings.

10 Suomen Pankki · Finlands Bank Eurosystem objectives, tasks and operations

The primary objective of the Eurosystem is to maintain price stability in the euro area. This is the most effective means by which Eurosystem monetary policy can support ECB Governing Council decides welfare maximisation in the national econo- mies. To the extent possible, without jeopardis- ing the price stability objective, the Euro- National central banks prepare and implement system supports the general economic poli- cies of the EU, aimed for example a balanced economic performance, sustainable and environmentally responsible economic growth, as well as a high level of employment Eurosystem decision- and favourable social conditions. Bank of Finland serves as expert on the making centralised in ECB To achieve these aims, the Eurosystem Finnish economy and also contributes to Governing Council; uses the following tools: analytical work concerning the euro area preparations and implementation largely – deciding and implementing the single and world economy. decentralised among monetary policy Decisions are made in the ECB Governing national central banks – holding and managing euro area coun- Council on a simple-majority basis. Regard- tries' international reserves and, as needed, ing all policy decisions, each member has one conducting foreign exchange operations vote and hence an equal input into those decis- – promoting smooth operation of payment ions. Monetary policy actions are based on systems the outlook for inflation and other economic The Eurosystem also monitors develop- developments in the whole euro area. Mem- ments in the banking and financial sector, bers do not pursue national interests but ra- issues guidelines concerning its areas of com- ther take a euro area-wide perspective. petence, and oversees compilation of statis- Even though decision-making is centra- tics in connection with monetary policy. lised in the ECB Governing Council, decis- Moreover, the ECB Governing Council has ions are prepared and implemented largely the sole right to issue banknotes and the right in a decentralised manner among the na- to approve the amounts of coin issuance in tional central banks. For example, monet- euro area countries. ary policy preparations and implementa- The ECB and national central banks co- tion are decentralised and all banks operate in producing economic forecasts for operating in Finland handle their central use in determining monetary policy. The banking matters via the Bank of Finland.

Suomen Pankki · Finlands Bank 11 Monetary policy

ECB monetary policy decisions are based on broad-ranging analyses of economic conditions in the euro area. Picture shows the Bank of Finland's Market

Operations Department Jussi Aalto Photograph:

Monetary policy, broadly interpreted, in- Monetary policy is transmitted to the cludes all efforts by public authorities to economy in a number of different ways. affect the structure and functioning of the Policy operations affect the liquidity of the monetary system. Monetary policy aims banking system, market interest rates and at furthering the goals of overall econo- exchange rates. Inflation and inflation ex- mic policy. In practice, monetary policy is pectations affect the level of the real interest conducted by central banks, by influen- rate, which in turn affects aggregate de- cing the economy's money supply, market mand and supply in the economy. interest rates or - depending on the ex- Inflation change rate regime - foreign exchange ECB's monetary policy objective Reduction of the real value of money, ie a general rise rates. The primary objective of ECB monetary in the price level. Monetary policy's traditional task is to policy is to maintain price stability in the Real The true interest rate, cor- stabilise the value of money, which means euro area - defined as annual inflation of rected for the effects of in- curbing inflation and inflation expecta- less than 2%, as measured by the harmon- flation. In times of high in- flation, the real interest rate tions. The most effective way to restrain in- ised index of consumer prices - over the is considerably lower than the nominal interest rate; flation expectations is to set a measurable medium term. In striving for this goal, the correspondingly, in times of deflation, the real interest goal and clear strategy for monetary policy, aim is to keep inflation close to 2% over rate is higher than the nom- inal interest rate. so as to inform the public beforehand exact- the medium term and thus to also prevent ly what economic indicators the central deflation, in other words, a damaging fall Deflation A general decline in the lev- bank will focus on and how it intends to in the price level. In setting the inflation el of prices - opposite of in- flation. achieve its goals. goal, possible measurement problems

12 Suomen Pankki · Finlands Bank Photograph: Jaakko Koskentola Photograph:

concerning the euro area have been taken and medium-term risks to price stability. into account. Long-run prospects for inflation are also ECB monetary policy decisions are evaluated by analysing the economy's based on broad-ranging analyses of money supply, because there is a clear con- economic conditions and money-supply nection between money supply and price developments in the euro area. Economic movements over the long run. The greater analyses deal eg with price and cost indi- the supply of money relative to the size of ces, wages, exchange rates, and various the economy, the more likely it is that pri- business cycle surveys. On the basis of ces will rise. these, evaluations are made of the short-

Suomen Pankki · Finlands Bank 13 Eurosystem monetary policy instruments

Open market operations Minimum reserves framework Standing facilities

Main refinancing operations Obligation to hold minimum reserves Deposit Marginal lending facilities facilities Longer-term refinancing operations Different monetary Fine-tuning operations policy instruments are used to steer the level of Structural operations market interest rates

Monetary policy instruments tenders in which banks inform the central The Eurosystem has several monetary poli- banks of how much money they want and cy tools it can use to maintain price stability. at what interest rates. A minimum bid rate Most important among these are the main is set for each tender, which serves as the refinancing operations, in which the Euro- Eurosystem's key interest rate. system uses changes in the key interest rates Longer-term refinancing operations en- to send signals regarding the stance of able credit institutions to obtain extra liqui- monetary policy. If analyses indicate that dity from central banks in the form of inflation is accelerating excessively, the three-month credits. These monthly opera- ECB Governing Council can raise its key tions are conducted as variable tenders and, rates; or if instead inflation threatens to as they are not used for policy signalling, slow excessively, the key rates can be low- there are no minimum bid rates. ered. When the need arises, the Eurosystem The instruments of monetary policy are can also conduct fine-tuning or structural used to steer short-term market interest operations. Fine-tuning operations are used rates, regulate market liquidity, and signal to smooth the effects of unexpected fluctu- the stance of monetary policy. The national ations in interest rates or liquidity and Key central bank interest rates central banks simultaneously implement structural operations to influence banks' Key central bank interest monetary policy operations according to long-term liquidity position vis-à-vis the rates are set in accord with the stance of monetary poli- the directions of the ECB. Eurosystem. cy and to influence market liquidity and movements in Of open market operations, the most A minimum reserve system is in effect in market interest rates. The Eurosystem's key interest important are the main refinancing opera- the euro area, which obligates banks and rates are the rate on ECB main refinancing operations, tions. In these weekly operations the Euro- other credit institutions to hold specified the marginal lending rate, system provides banks with liquidity by of- amounts of their assets in national central and the deposit rate. fering them short-term (one-week) credits. banks. The system enables regulation of Liquidity The ability to pay. The interest rates charged are determined in credit institutions' liquidity and smoothing

14 Suomen Pankki · Finlands Bank of movements in short-term market inter- issue general guidelines to the ECB regarding est rates. Interest is paid on these deposits, exchange rate policy. The guidelines cannot, at rates equal to prevailing minimum bid however, compromise the ESCB's indepen- rates in the Eurosystem's main refinancing dence or conflict with the price stability ob- operations. jective. The Eurosystem's standing facilities enable credit institutions to obtain liqui- International reserves dity from, or deposit excess amounts in, The Bank of Finland's own the national central banks at the end of international reserves amounted each banking day. Interest rates on these to about EUR 9.2 billion at the overnight loans and deposits, which are end of 2003. The Bank needs such set by the ECB Governing Council, form reserves to prepare for possible additional Photograph: Jaakko Koskentola an 'interest rate corridor' whose upper transfers to the ECB and to participate in bound is the marginal lending rate and IMF financing if necessary to ensure the se- lower bound is the deposit rate. Adjust- curity of the international monetary system. ments in the corridor signal the stance of The Bank could also find itself in an emer- monetary policy and set limits on move- gency situation in which it would need its ments in interest rates on overnight inter- own international reserves. bank loans. At the start of 1999 the euro area na- tional central banks transferred a part of Exchange rate policy their own reserves to the ECB. The total The Eurosystem does not have an objective amount transferred was nearly EUR 40 bil- with respect to exchange rates. The euro is lion, of which the Bank of Finland's share a floating currency, which means that its was some EUR 700 million. The ECB needs exchange rates are determined freely in the international reserves in order to be able currency markets. When necessary, the to conduct possible foreign exchange oper- Eurosystem can nonetheless dampen ations. movements in exchange rates by interven- Although the investment of assets trans- ing, for example by buying or selling euro ferred to ECB ownership remains the respon- against other currencies. Possible interven- sibility of the national central banks, the re- tions are decided by the ECB Governing lated investment policy is decided by the Council and implemented by the national ECB. As to their own international reserve central banks in a decentralised manner. holdings, the national central banks decide The ECOFIN Council, composed of for themselves. EU finance and economic ministers, can

Suomen Pankki · Finlands Bank 15 Financial markets

The financial markets channel surplus Stability and efficiency of the savings of individuals and companies to financial system counterparts in need of financing. This The Bank of Finland's legally mandated transfer of funds is effected both through task - as regards financial system stability, banks and other credit institutions and di- reliability and efficiency - is referred to as rectly in the markets via the issuance of oversight of the financial system. As part of securities. Efficient and reliable operation that task, the Bank regularly monitors and of the financial system is important for the analyses the state and development of the economy as a whole. Efficient allocation financial system as a whole. The aim is to of finance and stable financial markets promote financial stability without inter- promote economic performance and fering in the operation of the system. The well-being. Financial Supervision Authority, which op- Payment systems are an important part erates as an independent body in connec- of the foundation of the economy and finan- tion with the Bank, is charged with super- cial system. Fast and reliable payment-flows vising the involved institutions - credit between economic units promote the institutions, financial firms and exchanges smooth functioning of the economy. Other - in terms of risks, capital adequacy and key parts of the financial system's founda- legality of operations. tion are the systems used in executing secur- Key to the Bank of Finland's oversight ities trades. task is the analysis of banking-sector pay- The Bank of Finland acts to maintain ment and settlement systems in terms of sta- and increase the stability, reliability and bility and efficiency. The tools used include efficiency of financial and payment sys- oversight of various systems, operative par- tems in Finland. The aim is to prevent fi- ticipation in payment systems and, in co- nancial crises if possible and otherwise to operation with the Eurosystem and other manage them in an effective manner. The authorities, the development of crisis central bank's tools for carrying out this management techniques, as well as joint task are payment transfer operations, efforts with market participants. general oversight and financial opera- Introduction of the euro has harmon- tions, and participating in the develop- ised the euro area financial system and in- ment of these systems. The Bank works in creased the need for cooperation between close cooperation with other supervisory EU national supervisory authorities. Co- and regulatory bodies. operation is facilitated by numerous ESCB and EU committees dealing with banking and payment systems. Through such

16 Suomen Pankki · Finlands Bank committees, the ESCB plays a major role in promoting the financial stability of the euro area. The need for cooperation among authorities in the Nordic and Baltic coun- tries has also increased, along with the rapid growth and development of financial institutions' cross-border activities and system linkages in the region.

Payment systems

The basic structure of the European finan- Jussi Aalto Photograph: Finnish banks can transmit cial markets is changing rapidly with the payments, in addition to TARGET. But payments to all EU coun- development of the single market, as coun- even these payments often involve transfers tries via the TARGET sys- try-specific systems are replaced by more of payment cover via TARGET. tem. The picture shows part of the Bank of Fin- efficient Europe-wide systems. Among the The Finnish part of TARGET is the land's Payments and Set- most important of these is the inter-central- BoF-RTGS (Bank of Finland Real-Time tlement Department bank TARGET system, through which euro Gross Settlement System). In Finland, area monetary policy operations are imple- BoF-RTGS account holders - mainly banks mented. TARGET links together the nation- and other credit institutions - can handle al real-time gross settlement systems of the their payment transactions with other EU countries and the ECB. credit institutions and the Bank of Finland. Nearly every EU-country credit institu- The system operates totally electronically tion is connected to TARGET, through ei- and largely automatically. Payments in the ther its national central bank or another system are irrevocable and hence free of risk credit institution. The system was devel- to the receiver. In order to facilitate the oped primarily to meet the needs of the sin- smooth flow of payments, the Bank may gle monetary policy. Its use in transmitting grant intraday credits to account holders other payments significantly reduces the as- against collateral. sociated risks because TARGET is designed so that payments are immediately final and TARGET irrevocable. TARGET can be used for trans- Trans-European Automated Real-time Gross settlement mitting both interbank and customer pay- Express Transfer system, ie ments. the system that forges the EU's national real-time Finnish banks can use numerous other gross settlement systems to form an EU-wide payment payment systems for making international system.

Suomen Pankki · Finlands Bank 17 Maintenance of currency supply

The Bank of Finland ensures the quality and authenticity of euro banknotes in Finland. Picture shows holograms

for EUR 100 banknotes Jussi Aalto Photograph:

The Bank of Finland serves as the country's that need cash, and transport returned authority in respect of currency mainten- money to cash centres and branches of the ance. With the approval of the European Bank of Finland, located in Kuopio, Oulu, Central Bank, the Bank of Finland issues Tampere, Turku and Vantaa. euro banknotes and coins and sees to the At the Bank of Finland's regional quality and authenticity of the banknotes. branches, euro banknotes are examined for Each year, the national central banks as a authenticity and quality and those in poor group print euro banknotes in accord with condition are disposed of. The Bank issues the needs of the Eurosystem. Production of new cash as needed. At the start of 2004, euro coins, on the other hand, is the respon- there were 108.5 million banknotes in cir- sibility of the ECOFIN Council and culation, with a total value of EUR 3.6 bil- national authorities, in Finland this is the lion. Coins in circulation numbered 710 Ministry of Finance. million and their value was EUR 286 mil- Working with the banks and other con- lion. cerned parties, the Bank of Finland ensures The Bank of Finland will continue to the efficiency and security of Finland's cur- redeem all markka banknotes and the newer rency maintenance operations. Besides the markka and penni coins until 29 February banks, those involved are the security trans- 2012. Silver-coloured markka and port firms, which specialise in the security ice-breaker fives will be redeemed until and transport of banknotes and coins. 31 December 2007, at the Bank's main These firms deliver banknotes and coins to office in Helsinki. the banks, ATMs, shops, and other business

18 Suomen Pankki · Finlands Bank Research and statistics

The Bank of Finland comprehensively monitors, compiles statistics on, and analyses the Finnish economy and

Photograph: Hanna Saira Photograph: financial markets

The Bank of Finland is one of Finland's key Statistics economic research organisations. The The Bank of Finland produces data concern- Bank's research focuses on tasks that con- ing Finland, as required by the European Sys- cern a central bank such as monetary policy, tem of Central Banks, on euro area monetary macroeconomic performance, and the func- financial institutions, financial markets and tioning of financial markets and payment balance of payments, as well as corresponding systems. Cooperation with Eurosystem national data. Data are published monthly in members, other central banks, and various the Financial Markets Statistical Review and other research organisations is extensive. in special publications. These publications in- The aim of the research is to provide clude extensive data on interest rates, depos- support for the preparation of monetary its, and loans relating to Finnish monetary fi- policy and assist economic decision-makers, nancial institutions, as well as on securities researchers and media representatives, markets, balance of payments, international particularly in Finland, to understand the investment position, and financial accounts. foundations and effects of Eurosystem In addition, data are published on euro area monetary policy. monetary policy instruments, exchange rates, The Bank's Institute for Economies in and the euro area and Finnish economies. The Transition monitors and analyses develop- data can also be accessed via the Bank's web- ments in the 'transition economies', espe- site (www.bof.fi). cially Russia and China. The Institute fo- cuses on these economies' economic policy developments, monetary and banking sys- tems, and public sector problems.

Suomen Pankki · Finlands Bank 19 Communication

In August 2003, the Bank of Finland Museum opened its doors. The mu- seum presents the work- ings of the monetary economy, both historically

and today Rauno Träskelin Photograph:

The Bank of Finland informs the Finnish The Bank of Finland Museum presents public of its own activities and Eurosystem the monetary economy, both in history and decisions. The aim is also to promote an in the present day, and explains the Bank's understanding of Eurosystem policies and present role as part of the European System transparent communications. of Central Banks. The Museum also has a The Bank makes known its views in re- collection that features the artistic aspect of spect of current economic conditions in ar- Finnish banknotes as well as a continuing ticles published in the quarterly Euro & ta- series of special exhibits. lous and Bank of Finland Bulletin. Other More details on the Bank's operations, key publications are the Bank's Annual Re- publications and statistics can be found on port, the Financial Stability report, and spe- the Bank's websites: www.suomenpankki.fi cial studies by Bank experts. and www.bof.fi.

20 Suomen Pankki · Finlands Bank International cooperation

The Bank of Finland works with many inter- national organisations that promote the de- velopment of economic and financial sys- tems. The European Central Bank is a major participant in the international financial markets. As a member of the Eurosystem, the Bank of Finland is now more extensively in- volved in international cooperation. The ECB Governing Council and the ESCB's International Relations Committee handle issues concerning the ESCB's external relations. The Bank of Finland is also represented on one of the EU Council's most important committees, the Economic and Financial Photograph: Jaakko Koskentola Photograph: Committee, which monitors economic con- The Bank of Finland works social development in the world's poorer ditions in the member countries and the EU in cooperation with as a whole and prepares the work of the countries by providing loans and advice. numerous international organisations ECOFIN Council. The Bank for International Settlements Finland has been a member of the Inter- (BIS) was founded in 1930 to promote coop- national Monetary Fund (IMF) since 1948. eration among central banks of different The IMF's objective is to promote strong eco- countries, and the Bank of Finland has been nomic performance and stable currencies in a shareholder from the start. The BIS moni- the member countries. The Fund monitors tors and analyses banking activities and cur- member country economies and occasional- rency markets, and its special concerns in- ly grants credits to strengthen their interna- clude banking supervision and stability tional liquidity positions. Finland's relations issues. The BIS is an important body for co- with the IMF are handled by the Bank of operation among central banks. Finland in cooperation with the Ministry of Finland joined the Organisation for Eco- Finance. nomic Cooperation and Development Relations with the IMF's sister organisa- (OECD) in 1969. Since that time, the Bank tion, the World Bank, are handled by the of Finland has participated mainly in the Ministry of Finance. The World Bank was OECD's work in the areas of economic pol- established in 1944 as an international finan- icy, financial markets, and liberalisation of cial institution for supporting economic and capital movements.

Suomen Pankki · Finlands Bank 21 Historical years

1809 1860 1890s 1926 Finland is separated from Finland obtains its own Rediscounting of bills of ex- Finland returns to the gold Sweden. The possibility of monetary unit - the markka. change of bank customers standard. Finland having its own bank- becomes commonplace and note-issuing bank is 1865 assumes a key role in the 1931 discussed in the Porvoo Diet. Monetary Reform: silver Bank of Finland's central bank Finland effectively abandons money becomes the sole policies. the gold standard. On the ini- 1811 legal tender; the markka is tiative of the Bank of Finland, ‘His Imperial Majesty’s Gra- linked to silver and replaces 1906 the banks conclude an agree- cious Regulations for an the rouble as the means of Clearing of interbank trans- ment on deposit rates, which Office of Exchange, Lending payment. actions commences at the serves as the basis for a prac- and Deposits in the Grand Bank of Finland. tice that will be observed for Duchy of Finland’, the 1868 many decades to come. Charter of the Bank of The Bank of Finland is sub- 1915 Finland. ordinated to the Estates (lat- The Bank of Finland suspends 1939–1944 er Parliament). redemption of banknotes in An extensive system of con- 1812 gold. trols on capital flows and The Bank of Finland issues its 1875 lending rates in effect during first (kopeck) banknotes. New Regulations for the Bank 1919 the war. of Finland, by which the task The Bank of Finland comes 1819 of the Bank is defined as under the guarantee and care 1945–1946 The Bank of Finland moves maintaining a stable and of Parliament and is super- At turn of year, banknotes are from Turku to Helsinki. secure monetary system. The vised by the Parliamentary clipped as a means of forcing State Treasury is founded and Supervisory Council elected loans to the state. 1840 its duties separated from by Parliament (Constitution The Bank of Finland’s first those of the Bank of Finland. of Finland, section 73). 1948 branches are established. Finland joins the Internation- 1877–1878 1925 al Monetary Fund (IMF) and 1840–1842 The markka is pegged to gold. The Regulations for the Bank the World Bank (IBRD). Mark- The 'Currency Transforma- of Finland (from 1993: Act on ka's international par value tion' is brought about, 1883 the Bank of Finland) and the defined (officially in 1951) in whereby Finnish and Russian The Bank of Finland’s Head many subsequent amend- terms of gold and US dollar. roubles are substituted for Office in Snellmaninaukio in ments define the Bank’s ad- circulating Swedish money. Helsinki is completed. ministrative bodies, functions 1950 and principal operating rules, Bank-specific credit quotas 1843 1886 until entry into force of new and penalty rates of interest The Bank of Finland begins The Bank of Finland is granted Acts on the Bank of Finland are introduced in the banks’ dealing in foreign bills of ex- the sole right to issue bank- (1998 and 1999). central bank financing change and quoting rates on notes in Finland. Design of the arrangement. bills of exchange. first banknotes to be manu- factured at the Bank’s own 1957–1958 1857 printing works commences; The markka again becomes The discount rate is raised to the notes are put into circula- externally convertible, 6%; Finland begins to con- tion three years later. following dismantling of duct interest rate policy. controls on foreign trade.

22 Suomen Pankki · Finlands Bank 1960 1979 1991 1 Jan 1999 Regulation of banks’ average Bank of Finland starts collect- The remaining exchange The euro area is born. The lending rates is introduced. ing cash reserve deposits controls are dismantled, and euro becomes the official from banks on the basis of an the clearing account be- currency of the euro area and 1963 agreement concluded with tween Finland and the Soviet the markka becomes one of Currency Reform: 1 markka = the banks. Union is terminated. Amend- the national denominations 100 old markka. New Curren- ment to Currency Act: mark- of the euro. Decision-making cy Act enters into force. 1980 ka's external value is defined power in monetary policy Bank of Finland discontinues in relation to the ECU, the matters is transferred to the 1969 operations in the forward currency unit of the Euro- Governing Council of the Finland joins the OECD and market for providing banks pean Community. European Central Bank. The accepts obligations relating with forward cover. Hence- Bank of Finland discontinues to codes of liberalisation of forth banks are allowed to 1992 calculation and publication of capital movements and cover their open forward pos- The markka is floated. reference interest rates. transactions in current ac- itions in the financial mar- count invisibles. kets. 1993 1 Jan 2002 New Currency Act; cash Euro banknotes and coins are 1971 1983 reserve system replaced by introduced in Finland and 11 Markka's fixed value in terms Regulation of interest rates minimum reserve system. other euro area countries. of gold as the basis for ex- is eased and banks’ central The Financial Supervision change rates is effectively bank credit quotas are abol- Authority commences 1 May 2004 abandoned and the Bank of ished. operations in connection Ten countries join the Euro- Finland begins to steer the with the Bank of Finland. pean Union: Cyprus, Czech markka's external value in 1986 Republic, Estonia, Hungary, terms of a currency index. Legislation governing foreign 1995 Latvia, Lithuania, Malta, Po- exchange is revised. Bank of Finland becomes a member land, Slovakia and Slovenia. 1975 Finland initiates gradual re- of the European Union. The Bank of Finland introduc- moval of controls on capital es its call money credit facil- movements. Regulation of 1996 ity. banks’ average lending rates Finland joins the Exchange is abandoned. Rate Mechanism (ERM). 1977 Amendment to the Currency 1987 1998 Act: trade-weighted currency Transactions in certificates of Parliament approves index is officially adopted for deposit are introduced as a Finland’s joining the euro ar- expressing markka's external method of monetary control ea. European Council decides value. The Bank of Finland’s while call money credits to on the countries to partici- Board is responsible for keep- banks diminish in import- pate in the euro area; Finland ing the index within the pre- ance. The Bank of Finland is one of them. The ECB and scribed fluctuation range. begins to calculate and the ESCB are established on 1 publish HELIBOR rates based June 1998, and the Bank of on CD transactions. Finland becomes a member of the ESCB.

Suomen Pankki · Finlands Bank 23 Glossary

Deflation European System of Central Banks (ESCB) A general decline in the level of prices - opposite of inflation. The ESCB was launched on 1 June1998. Although its member- ship includes all EU national central banks and the ECB, only the Central bank central banks in the Eurosystem participate in the conduct of The authority responsible for monetary policy, whose tasks in- the single monetary policy. The excluded EU national central clude influencing the economy's supply of money, market inter- banks participate in the cooperative work of the ESCB only to a est rates or exchange rates. The position and tasks of the central limited extent. bank vary notably among different countries. Eurosystem ECOFIN System comprising the European Central Bank and national The Council of the EU in the composition for deciding on eco- central banks of the euro area. The Eurosystem began con- nomic and financial matters. ECOFIN meetings are attended by ducting the euro area's single monetary policy at the start of finance or economic ministers from the EU countries. The Euro- 1999. group is an unofficial part of ECOFIN, comprising the finance ministers from the euro area countries, which meets to discuss - Inflation but not decide - matters concerning just the euro area. Reduction of the real value of money, ie a general rise in the price level. EMU Economic and Monetary Union, whose aim is to promote eco- Key central bank interest rates nomic cooperation and economic development among EU coun- Key central bank interest rates are set in accord with the stance tries. The EMU progressed in stages to reach the third and final of monetary policy and to influence market liquidity and move- stage on 1 January 1999. Stages 1 and 2, which began in 1990 ments in market interest rates. The Eurosystem's key interest and 1994, comprised a period of convergence among EU coun- rates are the rate on ECB main refinancing operations, the mar- tries, and stage 3 marked the introduction of the common cur- ginal lending rate, and the deposit rate. rency - the euro - in the countries participating in the euro area. Liquidity Euro (€, e. EUR) The ability to pay. The common currency of the euro area, adopted at the start of stage 3 on 1 January 1999. Initially, the euro was used only as Monetary policy account money. Then, on 1 January 2002, euro-denominated Public authority measures that influence the structure and func- banknotes and coins replaced markka and other euro area na- tioning of the monetary system. Monetary policy is aimed at tional banknotes and coins. achieving the goals of general economic policy. Central banks implement monetary policy by affecting the economy's money Euro area supply, market interest rates, or exchange rates. Area comprised of those EU countries that have adopted the euro: (at end-2003) Netherlands, Belgium, Spain, Ireland, Italy, Real interest rate Austria, Greece, Luxembourg, Portugal, France, Germany and The true interest rate, corrected for the effects of inflation. In Finland. times of high inflation, the real interest rate is considerably low- er than the nominal interest rate; correspondingly, in times of European Central Bank (ECB) deflation, the real interest rate is higher than the nominal inter- The administrative centre of the ESCB and Eurosystem, estab- est rate. lished on 1 June 1998. The ECB is owned by the national banks of all the EU countries. It is located in Frankfurt, Germany, and its TARGET staff numbered 1200 at end-2003. Trans-European Automated Real-time Gross settlement Express Transfer system, ie the system that forges the EU's national European Council real-time gross settlement systems to form an EU-wide pay- Summit meeting of the EU, attended by member-states' Heads ment system. of State or Government. Its tasks include the provision of broad guidelines for economic policy and taking up of issues that other EU bodies have not been able to resolve.

24 Suomen Pankki · Finlands Bank Suomen Pankki Snellmaninaukio PO Box 160 00101 HELSINKI Tel. + 358 9 1831 Fax + 358 9 174 872 www.suomenpankki.fi or www.bof.fi Email: [email protected] Customer desk: Mon-Fri 9.30-12, 12.40-15.30

Communications Department Tel. + 358 9 183 2628; 9 183 2651; 9 183 2626 Fax + 358 9 658 424 Email: [email protected]

Statistics Desk Tel. + 358 9 183 2090 Fax + 358 9 183 2556 Email: [email protected]

Publication subscriptions, answering machine Tel. + 358 9 183 2566 Fax + 358 9 174 872 Email: [email protected]

Bank of Finland Museum Snellmaninkatu 2 Tel. + 358 9 183 2981, 9 183 2651 Open Tue-Fri 12-19, Sat-Sun 11-16 www.rahamuseo.fi Email: [email protected]

Editor: Hanna Saira Photographs: Jussi Aalto, Johan Ahlroth, Jaakko Koskentola, Peter Mickelsson, Hanna Saira and Rauno Träskelin Design and layout: Jocce Jönsson Reproduction: Textop Oy Printing: Speedmaster Oy, Helsinki, April 2004